Supply Chain Strategy

1. Supply Chain Strategy Swiss Federal Institute of Technology Zurich (ETH Zurich) Kühne-Stiftung, Führungskräfte-Qualifikationsprogramm: Netzwerkmanagement für logistische Prozesse (NetloP) 2010 Zurich, April 22, 2010 Univ.-Prof. Dr. Stephan M. Wagner Chair of Logistics ManagementSwiss Federal Institute of Technology Zurich (ETH Zurich)

2. Content • Supply chain and competitive strategy • Empirical results – Top management must be concerned

3. 1. Supply chain and competitive strategy – Achieving strategic fit

4. A "typical" value chain • Consistency and support between competitive strategy, supply chain strategy, and other functional strategies is important Competitive strategy Product development strategy Supply chain strategy Marketing and sales strategy New product development Purchasing and Supply Operations Distribution Marketing and sales Support: Finance, accounting, information technology, human resources

5. Achieving strategic fit • Strategic fit • Consistency between customer priorities of the competitive strategy and supply chain capabilities specified by the supply chain strategy • Competitive and supply chain strategies have the same goals • A company may fail because of a lack of strategic fit or because its processes and resources do not provide the capabilities to execute the desired strategy

6. How is strategic fit achieved? • Step : Understanding the customer and supply chain uncertainty • Step : Understanding the supply chain • Step : Achieving strategic fit 1 2 3

7. 1 Understanding customer needs • Identification of the needs of the customer segment being served, based on individual attributes such as • Quantity of products needed per lot • Response time customers will tolerate • Variety of products needed • Service level required • Price of the product • Desired rate of innovation in the product • Needs of customers within a particular segment: very similar • Needs of customers indifferent segments: very different

8. Impact of customer needs on implied demand uncertainty

9. The implied demand uncertainty spectrum Certain (predictable) supply and demand Highly uncertain (unpredictable) supply and demand Low Implied demand uncertainty High • Examples: • Tomato soup • Noodles • Long lead time steel • Purely practical products • Examples: • Trendy purses • High fashion • Mobile phones • Entirely new products Functional products Innovative products

10. Backup Implied demand uncertainty is often correlated with other characteristics of demand Source: Fisher (1997)

11. 2 Understanding the supply chain • After understanding implied demand uncertainty, the next question is: How does the firm best meet demand? • Dimension describing the supply chain is supply chain responsiveness • Supply chain responsiveness is the ability to … • respond to wide ranges of quantities demanded • meet short lead times • handle a large variety of products • build highly innovative products • meet a very high service level • Increasing responsiveness results in higher costs that lower supply chain efficiency (i.e., cost of making and delivering the product to the customer)

12. The responsiveness spectrum Highly efficient Somewhat efficient Somewhat responsive Highly responsive Supply chain responsiveness Example: Example: Example: Example: Custom-made PCs Noodles Underwear Automobiles Efficient supply chains Responsive supply chains

13. 3 Achieving strategic fit • Goal is to ensure that what the supply chain does well is consistent with target customer's needs • All functions in the supply chain must support the competitive strategy to achieve strategic fit, e.g. • Purchasing and supply • Operations • Distribution • Two key points • There is no right supply chain strategy independent of competitive strategy • There is a right supply chain strategy for a given competitive strategy

14. Achieving strategic fit Responsive supply chain Zone of strategic fit Responsiveness spectrum Efficient supply chain Implied uncertainty spectrum Predictable demand (functional products) Unpredictable demand (innovative products)

15. Exercise Supply chain strategy for different products

16. Design principles: Comparison of efficient and responsive supply chains Source: Fisher (1997)

17. Other issues affecting strategic fit Multiple products and customer segments Competitive changes over time Product life cycle • Firms sell different products to different customer segments (with different implied demand uncertainty) • Supply chain has to be able to balance efficiency and responsiveness given its portfolio of products and customer segments • Two approaches:(1) Different supply chains(2) Tailored supply chain to best meet the needs of each product's demand • Competitive situation and competitive strategy can change over time • More competitors or increasing Internet sales, for example, may result in an increased emphasis on variety at a reasonable price • The supply chain must change to meet these changing competitive conditions • Demand characteristics of a product and needs of a customer segment change as a product goes through its life cycle • Supply chain must evolve throughout the life cycle • Early: uncertain demand, high margins, product availability is most important, cost is secondary • Late: predictable demand, lower margins, price is important

18. Achieving strategic fit becomes increasingly difficult • Implied demanduncertainty increases, e.g. • Increasingly demanding customers • Decreasing product life cycles • Increasing variety of products • Diminishing "control" over the supply chain, e.g. • Fragmentation of supply chain ownership • Globalization with more widespread supply chains • Defining strategy is important, however, successful implementation and execution is key. This requires, e.g. • Adequate management • Talented employees • Culture (change management)

19. 2. Empirical results – Top management must be concerned

20. We conducted a global supply chain and surveyed 234 mostly stock-listed manufacturing companies • Global supply chain study conducted from end of 2007 until mid of 2008 in cooperation with the Stanford University and Roland Berger Strategy Consultants • Surveying mainly stock listed manufacturing companies in Europe and USA on product and supply chain characteristics based on a standardized questionnaire1) • Survey results were combined with publicly available financial data • Total sample consists of 234 different companies2) from 16 countries, 5 industry groups, & with average sales of approx. EUR 11.5 bn Financial data Questionaire 1) Focusing on the main product line (sales driver) of the firm 2) Respondents: Top management of SCM, Purchasing or Logistics Department

21. The main objective was to analyze the impact of strategic supply chain fit on firm performance • Identify relevant supply chain design characteristics corresponding to the existing product characteristics  • Analyze, if companies design their supply chain according their product characteristics to achieve "supply chain fit" • Analyze if companies with supply chain fit achieve higher firm performance (measured in return on assets, EBIT, sales growth, return on capital employed) than companies without fit Key question: How should supply chains be structured to achieve superior performance? Product charac- teristics Supply chain fit Firm perfor-mance Supply chain structure

22. The focus was on large European and US manufacturing companies in various industries Sample composition Countries Industries Revenues 234 Companies Other 0-50 mio. Automotive 50-100 mio. Engineered products AUT 10 bn and more 4% 7% 9% 100-250 mio. CH USA Electrical equipment 7% 29% 8% 6% 29% 32% 5% 18% UK 250-500 mio. 9% 9% 8% 13% 500-1,000 mio. 21% 23% FRA 28% 35% Consumer goods Process industry GER 1-10 bn Survey was conducted mainly in USA and Western Europe Focus on manufacturing industries 64% of blue chips with sales turnover >EUR 1 bn

23. The responses include blue chips in all industry clusters – Examples Consumer goods (49) Process industry (54) Engineered products (66) Electrical equipment (43) Automotive products (22) ( ) Total number of companies per industry segment

24. Firm performance: ROA significantly higher for companies with supply chain fit ROA (2004-2006, average, %) Standardized products Customized products SC structure No. of companies Firm performance Avg. ROA SC structure No. of companies Firm performance Avg. ROA FIT 114 (63%) 21 (39%) Efficient 11% Efficient 5% FIT 66 (37%) 33 (61%) Responsive 5% Responsive 9% Total 180  +6% points Total 54  +4% points

25. Companies with a supply chain fit also outperform on ROCE, sales growth and EBIT margin ROCE, sales growth, EBIT margin (2004-2006, average, %) Standardized products Customized products SC structure ROCE value1) Sales growth EBIT margin SC structure ROCE value1) Sales growth EBIT margin FIT Efficient 25% 14% 10% Efficient 14% 8% 8% FIT Responsive 11% 6% 6% Responsive 31% 13% 10%  % points +14% +8% +4%  % points +17% +5% +2% 1) ROCE = EBIT / Capital employed (Net fixed assets + current assets – current liabilities)

26. Backup Companies with strategic supply chain fit outperform on all performance indicators (1) • Out of 180 companies with standardized products, 63% achieve a strategic supply chain fit. They have designed their supply chains according efficient design characteristics and prioritize cost, inventory reduction and improvement of utilization rates. Compared to companies without supply chain fit: • ROA: + 6% points • ROCE: + 14% points • Sales growth: + 8% points • EBIT margin: + 4% points

27. Backup Companies with strategic supply chain fit outperform on all performance indicators (2) • Out of 54 companies with customized products, 61% achieve a strategic supply chain fit. They have designed their supply chains according responsive design characteristics and prioritize flexibility, delivery reliability and service levels. Compared to companies without supply chain fit: • ROA + 4% points • ROCE: + 17% points • Sales growth: + 5% points • EBIT margin: + 2% points

28. Summary of supply chain challenges 2009-2010 identified by the firms Source: Wagner/Erhun/Grosse-Ruyken (2009)